Managerial Accounting (MGM 5500)

Student Names: __________________________________________ Date: ____________

1. Alger Company specializes in manufacturing motorcycle helmets. The company has enough
orders to keep the factory production at 1,000 motorcycle helmets per month. Alger’s monthly
manufacturing cost and other expense data are shown below.

Maintenance costs on factory building $1,500

Factory manager’s salary $5,500
Advertising for helmets $8,000
Sales commissions $4,000
Depreciation on factory building $700
Rent on factory equipment $6,000
Insurance on factory building $3,000
Raw materials (plastic, polystyrene, etc.) $25,000
Utility costs for factory $800
Supplies for general office $200
Wages for assembly line workers $54,000
Depreciation on office equipment $500
Miscellaneous materials (glue, thread, etc.) $2,000

Instructions

(a) Prepare an answer sheet with the following column headings.

Product Costs
Cost Direct Direct Manufacturing Period
Item Materials Labor Overhead Costs

Enter each cost item on your answer sheet, placing the dollar amount under the
appropriate headings. Total the dollar amounts in each of the columns.

(b) Compute the cost to produce one motorcycle helmet.

2. Larry’s Lawn Services provides custom landscaping for homes and businesses and uses job
order costing to capture the cost of its landscaping jobs. There are no jobs in process at the
beginning of May. Listed below are data concerning the three landscaping jobs conducted during
May.

Southside Oceanview Rocky Heights

Direct materials $5,450 $7,635 $6,480
Landscaper labor costs $4,810 $5,980 $5,525
Landscaper hours 74 92 85

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Overhead costs are applied to jobs based on landscaper hours, and the predetermined overhead
rate is $60 per landscaper hour. The Southside job is the only incomplete job at the end of May.
Actual overhead for the month was $15,400.

Instructions

(a) Determine the cost of each job.

(b) Indicate the balance of the Landscape Contracts in Process account at the end of May.
(c) Calculate the ending balance of the Operating Overhead account for May.
(d) During May, Larry is approached by the owner of Mountain Estates who would like to
contract with Larry’s company. Larry is working to prepare the bid for Mountain Estates
and has the following information: Direct materials, $10,450 and Landscaper hours, 125
hours. Analyze the financial information provided for Southside, Oceanview and Rocky
Heights and help Larry complete his bid by estimating the total cost of the Mountain
Estates job.

3. City University uses a process cost system to accumulate costs incurred in handling student
applications in the admissions department. When an application is completed, it is forwarded to
the appropriate academic department for final processing. The following processing and cost
data pertain to March.

1. Applications in process on March 1 250

2. Applications started in March 1,100
3. Completed applications during March 950
4. Applications still in process on March 31
were 100% complete as to materials (forms)
and 75% complete as to conversion costs.

Beginning WIP:
Direct materials $ 2,125
Conversion costs 9,450

March costs:
Direct materials $ 8,000
Direct labor 43,000
Overhead 10,050

Materials are the forms used in the application process, and these costs are incurred at the
beginning of the process. Conversion costs are incurred uniformly during the process.

Instructions

(a) Determine the equivalent units of service (production) for materials and conversion costs.
(b) Compute the unit costs and prepare a cost reconciliation schedule.
(c) In an effort to improve efficiency, City University has changed their admissions
procedures. Instead of adding all the materials at the beginning of the process, they have

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 decided to add half of the materials at the end of the process right before the applications
are transferred to the academic departments. This has resulted in a $2,000 savings in
March’s direct materials costs (beginning direct materials are not affected). Determine
the equivalent units of service (production) and the cost per equivalent unit for materials
based on this change. If City University processes 12,000 applications during a typical
year, what is the total dollar amount of savings that will result from this change?

Note: Round all calculations to the nearest penny.

4. Smithson, Inc. produces two types of gas grills: a family model and a deluxe model.
Smithson’s controller has decided to use a plantwide overhead rate based on direct labor costs.
The president of the company recently heard of activity-based costing and wants to see how the
results would differ if this system were used. Two activity cost pools were developed:
machining and machine setup. Presented below is information related to the company’s
operations:

Family Model Deluxe Model

Direct labor costs $75,000 $150,000
Machine hours 2,000 2,000
Setup hours 200 800

Total estimated overhead costs are $450,000. Overhead cost allocated to the machining activity
cost pool is $270,000 and $180,000 is allocated to the machine setup activity cost pool.

Instructions

(a) Compute the overhead rate using the traditional (plantwide) approach.
(b) Compute the overhead rates using the activity-based costing approach.
(c) Determine the difference in allocation between the two approaches.
(d) Smithson, Inc. decided to implement the activity-based costing approach and was quite
successful in its use. However, the controller is wondering if instead of only two activity
cost pools, they should expand to three activity cost pools based on the following:

Family Model Deluxe Model

Direct labor costs $75,000 $150,000
Machine hours 2,000 2,000
Setup hours 200 800
Packaging hours 50 75

The estimated overhead of $450,000 is allocated as follows: machining activity cost pool
$240,000, machine set up $170,000 and packaging $40,000.

(1) Determine the overhead rates using the activity-based costing approach with three
cost pools.
(2) Determine the overhead allocation for the family model and the deluxe model
using three activity cost pools. What is the difference in allocation between two

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 activity cost pools and three activity cost pools? Is the difference in allocation
worth using the third activity cost pool?

5. Joyful Journeys Music School provides private music lessons for elementary students. Its
operating costs are as follows:

Rent on facilities $2,200 per month

Advertising $274 per month
Instrument Rent $750 per month
Teaching Instruction $40 per student
Books $5 per student
Other Costs $3 per student

Joyful Journeys charges $100 per student per month.

Instructions

(a) Determine the company’s break-even point in (1) number of students taught per month
and (2) dollars.

(b) Joyful Journeys has just received notice that the rent on their facilities will be increasing
by $500 per month and the instrument rent will also be increasing $20 per month. (1)
Determine the company’s break-even point in the number of students taught per month
based on the new information. (2) Determine the amount to charge per student if Joyful
Journeys does not increase the number of students taught.

6. Tasty Time Cafeteria operates cafeteria food services in public buildings in the Midwest.
Tasty Time is contemplating a major change in its cost structure. Currently, all their cafeteria
lines are staffed with hourly wage employees who hand serve the food to customers. Benson
Riggs, Tasty Time’s owner, is considering replacing the employees with an automated self-
service system. However, before making the change, Benson would like to know the
consequences of the change, since the volume of business varies significantly from location to
location. Shown below are the CVP income statements for each alternative.

Personal Service Automated Self-Service

System System ______
Sales $2,500,000 $2,500,000
Variable costs 1,875,000 1,125,000
Contribution margin $ 625,000 $1,375,000
Fixed costs 125,000 875,000
Net Income $ 500,000 $ 500,000

Instructions

(a) Determine the degree of operating leverage for each alternative.

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(b) Which alternative would produce the higher net income if sales increased by $250,000?
(c) Using the margin of safety ratio, determine which alternative could sustain the greater
decline in sales before operating at a loss.
(d) Tasty Time’s vice president of finance has offered another option. He suggests a different
system that combines personal service at key points in the cafeteria line with a less
expensive automated self -service system for the other items. The financial information
on this system is given below:

Blended Service
System
Sales $2,500,000
Variable costs 1,500,000
Contribution margin $ 1,000,000
Fixed costs 500,000
Net Income $ 500,000

(1) Determine the degree of operating leverage for this option.

(2) How much would net income increase if sales increased by $250,000?
(3) Using the margin of safety ratio, how large of a decline in sales could this option
sustain before operating at a loss.
(4) Which option do you recommend for Tasty Time Cafeteria?

7. Conklin Company manufactures outdoor fireplaces. For the first 9 months of 2020, the
company reported the following operating results while operating at 80% of plant capacity:
Sales (75,000 units) $6,750,000
Cost of goods sold 4,875,000
Gross profit 1,875,000
Operating expenses 750,000
Net income $1,125,000

Cost of goods sold was 80% variable and 20% fixed; operating expenses were 70% variable and
30% fixed.

In October, Conklin Company receives a special order for 4,000 fireplaces at $62 each from
Langston’s Landscape Company. Acceptance of the order would result in an additional $7,000 of
shipping costs but no increase in fixed operating expenses.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Conklin Company accept the special order? Why or why not?
(c) Before Conklin could give Langston’s Landscape Company an answer, they received a
special order from Benson Building & Supply for 15,000 fireplaces. Benson is willing to
pay $65 per fireplace but they want a special design imbedded into the fireplace that
increases cost of goods sold by $67,500. The special design also requires the purchase of
a part that costs $5,000 and will have no future use for Conklin Company. Benson

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Building & Supply will pick up the fireplaces, so no shipping costs are involved. Due to
capacity limitations, Conklin cannot accept both special orders. Which order should be
accepted? Document your decision by preparing an incremental analysis for Benson’s
order.